Term Insurance

Term insurance is the most traditional life insurance policy wherein the insured gets death benefit if any contingency happens within the policy term. The insured is, however, not entitled to receive any survival benefit if he outlives the policy term.

Term insurance policies are available in the range of 10-30 years term. These plans are relatively cheaper than endowment policies, money back policies and ULIP's. The benefits in a term insurance policy can be availed only in the event of the death of the insured.

Term insurance plans are much easier to understand than insurance plans such as endowment policies which combine risk cover with savings. Plans which comprise risk cover plus a savings component are also known as cash value plans. It is not always easy for a layperson to divide the premium he pays into risk cover cost and the amount actually being invested on his behalf as savings. Planning financial goals around a cash value insurance plan can get really complicated. There are rules governing things like the size of your cash value savings versus the policy death benefit and the repayment of policy loans etc. Term life, on the other hand, is the essence of simplicity - pay the premium and get covered for the term chosen.

Competitive pricing

Term life policies can be easily compared with each other on the basis of price as they are structurally similar and also simple to understand. This has led to a very competitive market in which term life policies are rapidly becoming a "commodity". Buyers suffer fewer information problems with term insurance, thus rendering the term market more price-competitive than for cash value policies.

Flexibility

Opting out of a term life policy is much easier than getting out of cash value policies. In term policies if you stop paying the premium the risk cover ceases and the policy ends. Nothing is payable to you as there is no savings element in the policy. However, cash value policies only give the full promised survival benefit if they are held for the full tenure of the policy. If you stop paying premiums mid-term there is financial loss as you cannot recoup your savings portion of the policy without certain deductions.

Further, many term life policies are "renewable" and "convertible." The former ensures that you can go in for another term policy without a medical exam at the end of the first term policy. The latter allows you to convert your term life policy into an endowment policy for the same sum assured with associated increase in premium, should this make sense during the term of the policy.

Lowest premiums

The premium for term insurance is much lower than that for comparative cash value policies. For example, currently it is possible for a 30-year old person to buy a level term insurance policy of 20 years for Rs 10 lakh sum assured for about Rs 3000 annual premium. For an endowment policy without profits, with exactly the same death benefit, the premium will be a little above Rs 30,000 annually. For an endowment policy with profits, the yearly premium will be about Rs 50,000.